Chattanooga Corp. v. Klingler

• Decision Date: 12 April 1983
• Docket Number: No. 82-5017,82-5017
• Parties: CHATTANOOGA CORPORATION, Plaintiff-Appellant, v. Dale H. KLINGLER, Harlen B. Jensen, Thomas H. Church, Richard Wilkins, Lewis C. Duncan, M.D., and James W. Sauder, Defendants-Appellees.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 903

704 F.2d 903

218 U.S.P.Q. 97

CHATTANOOGA CORPORATION, Plaintiff-Appellant, v. Dale H. KLINGLER, Harlen B. Jensen, Thomas H. Church Richard Wilkins, Lewis C. Duncan, M.D., and James W. Sauder, Defendants-Appellees.

No. 82-5017.

United States Court of Appeals Sixth Circuit.

Argued Jan. 10, 1983.

Decided April 12, 1983.

Charles B. Park, III, Bell, Seltzer, Park & Gibson, Ronald T. Lindsay, Charlotte, N.C. (argued), John B. Phillips, Jr. [L. COUNSEL], Hoyt O. Samples (argued), Stophel, Caldwell & Heggie, Chattanooga, Tenn., for plaintiff-appellant.

Geoffrey G. Young, Hugh J. Moore, Jr., Witt, Gaither & Whitaker, Chattanooga, Tenn., V. Frank Asaro (argued), Asaro & Associates, San Diego, Cal., for defendants-appellees.

Before CONTIE and WELLFORD, Circuit Judges, and MILES, District Judge. ^*

WELLFORD, Circuit Judge.

Chattanooga Corporation (Chattanooga), appellant, filed an action against six individuals, alleged to be residents of Idaho, Nevada, and California, in the United States District Court at Chattanooga, Tennessee, 528 F.Supp. 372, seeking a declaratory judgment and other equitable relief. Subject matter jurisdiction was not disputed in this dispute arising out of a contractual relationship between appellant Chattanooga and the former principals in Vari-Temp Manufacturing Corporation (Vari-Temp), a California corporation located in San Diego, which dissolved by agreement in 1977. Before Chattanooga contacted Vari-Temp about acquiring its assets including certain patents, Vari-Temp did not do business in Tennessee. Klingler, former President of Vari-Temp, who owned a controlling interest, conducted the negotiations for the proposed sale to Chattanooga prior to the dissolution of the California company and distribution of its assets to the six appellee shareholders. Appellee Sauder, a Nevada resident, was the only other among the shareholders active in Vari-Temp operations, which involved making cold therapy apparatus.

The sale price for the assets, including the patents which are the subject matter of this dispute, was $540,000. None of the assets prior to the sale were located in Tennessee. Negotiations which preceded the sale and transfer of the assets and patents took place in various places, finally concluding in San Diego. Klingler came to Tennessee during the course of these discussions, and there were numerous communications between him and appellant Chattanooga by mail and by phone.

During 1980 appellant sued each of the non-resident appellees "for a declaratory judgment of noninfringement and nonapplicability of the claims" of certain of the patents that had been owned by Vari-Temp and sold to it nearly three years before. It was asserted by Chattanooga that its claims "arise out of business transactions conducted in the State of Tennessee ... and operations set in motion by defendants (appellees) have a realistic impact on the commerce of the State of Tennessee ... contemplated by the defendants (appellees) ...." Chattanooga had paid royalties on the patents involved on products covered thereby from the time of sale. Chattanooga claimed that its operations in Tennessee did not involve any infringement on any of the patents and that the sale agreement should be voided and it should be relieved of any further minimum royalty payments.

The underlying agreement was to be governed by the laws of California and provided for arbitration of any controversy related to the agreement terms.

During a brief transition period after the 1977 sale, Klingler and Sauder were employed by Chattanooga; Klingler twice travelled to Tennessee pursuant to this employment, but Sauder never did. ¹ Service was had on all defendants under the Tennessee Long Arm Statute pursuant to Federal Rule of Civil Procedure 4. Jurisdiction was claimed by reason of a claimed federal question, having to do with the patents sold and assigned to Chattanooga, and also by virtue of diversity of citizenship.

The district judge considered the question of in personam jurisdiction raised by appellees on their motion to dismiss, or in the alternative to change venue. Appellees initiated arbitration proceedings on the issues raised in California and appellant sought to stay the California arbitration proceedings. The district judge ruled that the four non-active shareholders, who had an employment relationship with neither Vari-Temp nor Chattanooga, "did not purposefully avail themselves of the privilege of carrying on activities in Tennessee." He concluded, to the contrary, that "the nature of Klingler's actions make it appropriate for the court to assume jurisdiction over him." ² Klingler, he concluded, was "acting largely in his own interests" in negotiating the deal with Chattanooga and in coming to Tennessee pursuant thereto.

Finally, the Court decided that "Sauder lacked the personal involvement in the negotiations ... and the control over Vari-Temp," and thus found no personal jurisdiction over him. He concluded that Chattanooga's basic interest was to defeat appellee's claims for royalties due under the contract," not in averting harm to its business from a patent infringement suit," nor in giving public access to inventions purportedly covered by the patents in dispute. He ruled, therefore, that the cause of action in reality arose by contract, not by way of patent infringement, and that California was the proper forum, but dismissed the action because to do otherwise would preempt the parties' arbitration agreement. ³

Chattanooga relied principally upon Lear, Inc. v. Adkins, 395 U.S. 653, 89 S.Ct. 1902, 23 L.Ed.2d 610 (1969) in bringing the action to repudiate the agreement because of alleged failure of consideration due to the asserted invalidity of the patents acquired from Vari-Temp shareholders. On appeal, it claims that assertion of personal jurisdiction over all defendants is not only constitutionally appropriate but in accordance with "traditional notions of fair play." It further contends that the district court abused its discretion in not entertaining a declaratory judgment against Klingler, who is found to be subject to personal jurisdiction in Tennessee, where Chattanooga did business.

As determined by the district judge, the first and principal inquiry to be made in this case is whether the California, Nevada and Idaho residents (appellees) had or had not, under the circumstances, purposefully availed themselves of the privileges of the forum state, Tennessee. A frequently cited decision of this court discussed this problem and that of determining in personam jurisdiction over non-residents in an appeal arising from the same district court and the same district judge some fifteen years ago, Southern Machine Co. v. Mohasco Industries, Inc., 401 F.2d 374 (6th Cir.1968). As was stated in that decision

The nature and quality of a person's contact with a state that will serve as the basis for the exercise of in personam jurisdiction over that person by the state is not a subject of easy description.

Southern Machine, p. 380.

Prior to this court's decision in Mohasco, the Supreme Court had established in International Shoe Co. v. State of Washington, 326 U.S. 310, 66 S.Ct. 154, 90 L.Ed. 95 (1945), that in personam jurisdiction over a person not present in the state might be established through "minimum contacts ... such that the maintenance of the suit does not offend 'traditional notions of fair play and substantial justice.' " 326 U.S. at 316, 66 S.Ct. at 158. Doing acts in the state bringing about a "substantial connection" or even causing a known or expected consequence in the state may satisfy the "minimum contacts" test. McGee v. International Life Ins. Co., 355 U.S. 220, 223, 78 S.Ct. 199, 201, 2 L.Ed.2d 223 (1957), Southern Machine, supra, pp. 380, 381. The Supreme Court cautioned in Hanson v. Denckla, 357 U.S. 235, 78 S.Ct. 1228, 2 L.Ed.2d 1283 (1958), that to find in personam jurisdiction over a non-resident under such circumstances of "minimum contacts" and "substantial connection," there must also be "some act by which the defendant purposefully avails itself of the privilege of conducting activities within the forum state, thus invoking the benefits and protections of its laws," and to comport with minimal due process requirements. Hanson, 357 U.S. at 253, 78 S.Ct. at 1239. Southern Machine, supra, then set out three criteria for determining proper limits of in personam jurisdiction under the laws of Tennessee which prescribe methods of long arm service of process upon non-residents to the maximum extent permitted by constitutional due process standards. See 18 Vanderbilt Law Review 1484 (1965), 33 Tenn.Law Review 371 (1966); King v. Hailey Chevrolet Co., 462 F.2d 63 (6th Cir.1972); Pickens v. Hess, 573 F.2d 380 (6th Cir.1978). These standards have been recognized in later decisions by this court dealing with similar problems, such as Welsh v. Gibbs, 631 F.2d 436, 439 (6th Cir.1980); Capital Dredge v. Midwest Dredging Co., 573 F.2d 377 (6th Cir.1978); and First National Bank of Louisville v. Brewer Tire Co., 680 F.2d 1123 (6th Cir.1982). They are to be established by plaintiff-appellant by a preponderance of the evidence, as recognized by the district court:

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